British boardrooms failing miserably to engage with workers. It’s hurting their investors

Voting advisor Pirc found that company directors appointed to oversee ‘workforce engagement’ mostly don’t get paid for doing the job. Two in five don’t spend any time on it even as labour shortages start to bite into corporate performance, writes James Moore

Railpen’s latest voting guidelines stress the importance of engaging workers (PA)

It is fairly commonplace these days for companies to have directors charged, among other things, with overseeing “workforce engagement”.

Asking an existing, non executive member of the board to pretend to care about this was the easiest, and least radical option offered up when the former prime minister Theresa May decided to give employees a voice in the boardroom but stopped short of giving the reforms any teeth. So it was naturally the one they cleaved to.

For the record, the others were: set up an employee consultative council (clunky); create a worker director (no, the horror!); or explain why you should be allowed to ignore the rules. Doing the latter creates unnecessary fuss given that option one always looked like a cop out. So it has proved.

Pirc, which advises big investors on voting decisions, sought to find out how the reforms are working now they’ve been running for a while. It received responses from 72 of the company secretaries it raised the issue with.

The first question it asked them concerned whether non-executive directors (NEDs) assigned the “worker engagement” role had committed any extra time to it. Some 42 per cent said they had, in the range of between one and nine hours extra each month. This means some could have put in as much as two weeks a year, which would be quite impressive given that non-executive directorships are part-time roles, albeit very well-paid part time roles.

On the flip side, 41 per cent said no additional hours were committed.

A second question concerned pay. It’s common for NEDs to receive extra fees for taking on extra responsibilities such as, say, chairing a board committee. Rightly so. If you’re committing extra time to a role, you have a right to expect extra compensation for doing so.

But Pirc found there was no extra cash at a clear majority (60 per cent) of companies for the worker engagement role.

Now, if NEDs are assigning no additional time to these new responsibilities, and they’re not getting any additional money, are they actually responsibilities? Is this a job? Or is it a box ticking exercise?

“Taken in combination, these two findings suggest that our concerns about the lack of depth to such roles might be well founded,” Pirc says, with commendable understatement because to me the word “sham” would be entirely appropriate.

When I’ve raised this issue with business leaders, who tend to react with horror to the idea of having actual worker directors on their boards, they tend to say things like companies talk to their employees all the time, they have HR departments, it’s an integral function and there’s no need to formalise it at board level. You hear much the same thing from big, tradition minded, investment houses.

This is muddled thinking indeed.

Take HR departments. These are very much a part of the corporate machinery. They are under the thumb of the HR director who is in turn under thumb of the CEO (usually). CEOs tend to have big egos. They aren’t always overly fond of hearing bad news. Even where that’s not the case, problems don’t always reach them.

If the CEO asks the question, “why are we losing so many people”, the HR boss might very well say, “well, we’re in the middle a national labour shortage,” which gets them off the hook.

But NEDs aren’t under the thumb of the CEO. They’re supposed to represent investors’ interests and their direct boss is the chair. A NED who’d actually taken the time to go out on to the shop floor to ask questions, or who had roughed it in the staff canteen, might be more inclined to tell the CEO truth: your pay and conditions stink and the guy managing the factory in Solihull is a bully who’s not very good a their job.

An actual employee director – they do exist at a handful of companies – might be expected to have a still deeper understanding of workplace issues through living with them every day. Interestingly, the businesses that have them tend to speak quite highly of them.

All this demonstrates why employee representation on the board isn’t just in the interests of employees. It’s in the interests of investors. If a business you invest and hold shares in can’t hire, has to turn away business as a result (which has been happening), your returns will inevitably suffer.

There are signs that at least some investors are starting to wake up to this.

The updated voting policy of Railpen, the Railways Pension Trustee Company, says that in 2022 it will be “working with others to outline investor expectations around what a meaningful approach to workforce directors looks like in the US and UK markets”.

It continues: “Railpen believes that the inclusion of workforce perspectives at board-level can align the interests of shareholders, management and workers over the long term, as well as providing valuable insight into company operations and strengthening communication with stakeholders.”

It also says it could support voting for worker directors. A few more like that would count as real progress. It’s sorely needed.